Flash Crash 2.0?

Jorgé's picture
Rank: Neanderthal | 2,121

The May 6 flash crash was a crazy event, the Dow plunged 998 points and stocks like Accenture dropped from $40 to a single cent in the span of minutes. Debate on what may have caused it has been never-ending, from the fat finger theory to shitty trade execution getting the blame for it, but one guy has stepped up and says he knows why it happened, and claims that it WILL happen again.

From this Forbes article, Eric Scott Hunsader, CEO of Nanex, claimed that some fiendish quant may have been responsible for it, and has outlined 3 reasons why it will happen again:

Clusterstock:

The last one was caused on purpose.

The average quote volume on the NYSE is 10,000 per second. At one point on May 6, somebody launched 5,000 quotes at the NYSE for the ticker of Public Storage inside of one second. None of those quotes led to a trade--but that traffic by itself took the NYSE to 25% of its stable CQS capacity. So it's clear that one trader or perhaps more discovered that by blasting the NYSE, they could introduce added latency in the CQS feed. Knowing that most players were looking at a delayed NYSE feed, anybody in the know could make easy arbitrage plays between the NYSE and other exchanges.

Because mini flash crashes have happened before.

On April 28, for instance, the share prices of Wal-Mart and Procter dipped 50 cents for less than a second. If algorithms had been programmed knowing the dip was coming, profits are fat and easy.

The system has shown big delays more than once since then.

It seems that whenever the NYSE receives more than 20,000 quotes per second, its CQS feed, which determines where many equity orders get routed, falls behind.

Hunsader is also known for exposing "quote stuffing"- a method he argues quants may use to disrupt competitors by giving out very high rate bursts of quotes (up to 5000 quotes per second) and snatch invaluable processing time to grab the bid/ask spread themselves.

I'm curious what the quants here have to say about this, I know it sounds a little Bond villain like but I don't think it's a stretch to think that someone out there may be manipulating the markets with algos like this. Could a transaction tax kill this practice? How could this be regulated?

What do you guys think?

Bonus vid of some guy flipping out during the flash crash;


Comments (19)

Sep 1, 2010

that video is hilarious

Sep 1, 2010

Hahahahaah!!!! CANCEL ALL ORDERS!!! hahahaha!

People like Coldplay and voted for the Nazis, you can't trust people Jeremy

Sep 1, 2010

It's definitely possible. It's also unethical and likely illegal- as a web host, I would have to deal with a similar situation called DDOS attacks, which is treated as a felony.

That said, there's much easier ways to make a dishonest buck if you really want to. That's the problem with dishonest bucks, they're usually relatively easy to make but really hard to keep- so complicated dishonest bucks are pretty stupid. If you pardon the D&D reference, this quant (likely 22-year-old program trader) has an INT of 20 and a WIS of 6.

This person will eventually get caught- eventually, the NYSE will look into it and send the offender to the SEC and/or federal authorities. In order to get a quote or send a quote from/to CQS, you need an account to do it with. Unlike a DDOS attack which typically originates from some server in China, the NYSE knows exactly who controls the account that is spamming them.

Sep 1, 2010
IlliniProgrammer:

It's definitely possible. It's also unethical and likely illegal- as a web host, I would have to deal with a similar situation called DDOS attacks, which is treated as a felony.

That said, there's much easier ways to make a dishonest buck if you really want to. That's the problem with dishonest bucks, they're usually relatively easy to make but really hard to keep- so complicated dishonest bucks are pretty stupid. If you pardon the D&D reference, this quant (likely 22-year-old program trader) has an INT of 20 and a WIS of 6.

This person will eventually get caught- eventually, the NYSE will look into it and send the offender to the SEC and/or federal authorities. In order to get a quote or send a quote from/to CQS, you need an account to do it with. Unlike a DDOS attack which typically originates from some server in China, the NYSE knows exactly who controls the account that is spamming them.

Does the person buy CDSs for numerous ETFs, or does this person just buy when stocks hit rock bottom? I would imagine the later would easier to cover up than the first.

I am not cocky, I am confident, and when you tell me I am the best it is a compliment.
-Styles P

Sep 1, 2010

Hahaha. That video is hilarious.

Sep 1, 2010

THE EXUBERANCE

Sep 1, 2010

It has already been happening on some single name securities.

Sep 1, 2010

That guy is insane haha

Sep 1, 2010

lol that was a hilarious video

Sep 1, 2010

IP,

I disagree completely. The difference between a DDOS attack and a "Flash Crash" is that it doesn't matter who "attempts" this, as long as these people are considered liquidity providers, despite being the contrary, they are untouchable.

Outside of the Commodities market, where the CFTC is actually good at monitoring and keeping track, both the US Equity Market and Fixed Income Markets are more than easily screwed by problems like this. Unless you can prove who is doing it, no one is going to admit that their Algo screwed up, especially when these people provide "Liquidity" in the equity markets. Everyone in the HFT and Algo space is competing for Millisecond latency, so when everyone is hammering out a 1,000+ "trade attempts" a second, it's more than possible to overload the system and benefit from the multi-ms lag, even if it is only a split second. The problem isn't necessarily in creating the lag, but using the HFT system to game the National Best Bid Offer to artificially increase the price by using .0001 cent increments. If you look at the way the flash crash happened, 25% (I believe, but don't quote me, I don't have the figures in front of me) of the spammed bids were for .0001 cents. Similar tactics, using small 100 lot orders and .0001 cent increments are common techniques that have been seen when these trades are executed. A number of big names, like Irridium Asset Management, Southern Asset Management, Themis Trading and David Rosenberg of Gluskin Sheff, have all been speaking out about HFT and Algo Trading because of their ability to uncontrollably game the market, either by using a CQS Lag or gaming the NBBO.

The only reason why I brought up the CFTC, is that a Infinium Capital Management put out a commodities algo and shut it down withing 5 seconds after activating it because it caused a massive spike in Oil (Shifted the prices up $1) if I recall correctly and there was a massive (think $5 massive drop in the price of oil the following day or two. The CTFC called them when they realized what happened and started an investigation over this, and this was an algo in the wild for 5 seconds.

When you rig the casino and remove the smart money and retail investors, at what point will the computers eventually let themselves crash.

Just some food for thought.

Sep 2, 2010

Fair enough Frieds. I'm not 100% familiar with the internal workings of CQS, but one would think they could flag bids that come in at .0001 the next time it happens and trace it back to the account.

In any case, as a former web host, this really makes my skin crawl. The 14-year-old kids who got angry that they were kicked off of some forum are now 22 year olds and using the same technique to make outsize profits because the #($(#((#$**$*@ exchange can't figure out how to catch them.

Sep 2, 2010
Frieds:

I disagree completely. The difference between a DDOS attack and a "Flash Crash" is that it doesn't matter who "attempts" this, as long as these people are considered liquidity providers, despite being the contrary, they are untouchable.

IlliniProgrammer:

In any case, as a former web host, this really makes my skin crawl. The 14-year-old kids who got angry that they were kicked off of some forum are now 22 year olds and using the same technique to make outsize profits because the #($(#((#$**$*@ exchange can't figure out how to catch them.

Untouchable /b/-like quants? Doesn't sound good at all man. Any ideas on how to fix this? Some have argued that placing a transaction tax might curb this, but it would also add to every other investor/traders expenses, another idea was to simply charge for every canceled order, which may actually work. What do you guys think?

People like Coldplay and voted for the Nazis, you can't trust people Jeremy

Sep 8, 2010
Jorge:

Any ideas on how to fix this? Some have argued that placing a transaction tax might curb this, but it would also add to every other investor/traders expenses, another idea was to simply charge for every canceled order, which may actually work. What do you guys think?

Many traders would despise this, as canceled orders are not at all uncommon.

"Salesmen and traders are wild, cunning, aboriginal creatures who advise money managers about deceiving their bosses and finding new strip bars; their favourite phrase is, "Fuck you." IBankers eat fruit. Salesmen and traders eat meat, preferably fried."

Sep 8, 2010

Again, it sounds to me like the NYSE just needs a better logging system. Once they put that in place, some 22 year old kid will be getting a prison sentence longer than Bernie Madoff's for market manipulation.

There's a lot of other evil schemes out there for manipulating the market; many of them involve cash-settled derivatives and might be easier to get away with. I'm kinda surprised the market manipulators would be taking this strategy. But making a dishonest buck isn't any fun- it's the honest money that's the challenge.

Here's hoping they catch them.

Sep 2, 2010

It's a cool theory but last I checked they kept track of who or what entity was placing trades (drum roll...in order to execute them) so I don't see how you could anonymously spam orders like that. Sure the guy doing this might not have broken any law on the books, but his account would be banned once they figured out who he was. Also, if this were the source of the crash wouldn't someone at the exchange have noticed this a long time ago? However I am not an expert on back end systems by any stretch, so maybe there is some secret way...

Sep 2, 2010

IP, Yeah, it sucks. I could imagine how god awful those 14-year old brats were. It's all about pwn 2 0wn for them.
Now, I wish they would target people manipulating the NBBO by using .0001 cent increments, but again, it comes down to the belief of whether or not bringing charges against a "Liquidity Provider" is worth the time and effort.

Jorge, they won't change the rules when the NYSE is paying these people to provide liquidity. That's a major conflict of interest.

If they are tracking trades, they should have been all over this when it happened in May. It doesn't take a rocket scientist to trace the trades and parse the data, but it does take the head of the organization coming out and making a statement against it instead of having asset management groups come out against it. If, as an organization, the NYSE is so willing to accept HFT and Algo trading blindly, then their lack of desire to prosecute offenders if rather apparent. Ultimately, on the equity side, it is a matter of removing liquidity from the markets, which these HFTs and Algos do so very well... Going back to the Infinium example, as soon as this happened (and after they shut the algo down), they got a call from the CFTC saying wtf and were named in conjunction to a probe that the CFTC just completed on the oil manipulation issue. The only reason why this happened.... the CFTC has bite, the NYSE/SEC combo does not.

At the end of the day, only the machines will be left to play together.

Sep 2, 2010

At the end of the day, only the machines will be left to play together.

Either that or a bunch of $9.95/year unlimited everything web hosts run by 14 year old kids and a bunch of 12-year-old script kiddie DDOSers who got kicked off of their servers. Methinks they would revert back to that after taking over the markets.

Sep 2, 2010

Who knew Gilbert Gotfried was a trader??

Sep 2, 2010
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